Riccardo Brizzi - 05/03/2012

     For the first time since February 2010 the European Council held on 1st-2nd March did not take place in a climate of ‘last resort’. Testifying to the end of the “time of emergency” was first of all the generalised reduction in the spread (above all in the peripheral markets of the deficit) which, thanks to the liquidity injection effected by the ECB, has recorded a general drop in the differential between the ten-year yields of the European and German reference: in Italy the ten-year treasury bonds currently yield 4.95% (as compared with the 7.26% of a few month ago), in Spain 4.8% (as compared with 6.7%), Ireland has even gone from 14% to 7.9%. At the end of the summit most of the international commentators agreed with the summary made by Chancellor Merkel: “We have not emerged from the economic crisis, but we are leaving the financial crisis behind us.”
    The Brussels European Council indeed seemed addressed to definitively turning the page of the debt crisis, setting at least three fundamental points. Greece will not be abandoned to itself: the Finance ministers of the Eurogroup, satisfied with the measures taken by Athens, have announced the activation of the second aid plan for Athens (130 billion Euros, which are added to the 110 put aside in May 2010 and that should definitively approved after the Eurogroup on 12th March). In the second place the seventeen members of the Eurozone are equipped with the necessary instruments to fund their own debt thanks to the European Stability Mechanism (ESM) – a true and proper “European IMF” – and to the substantial intervention of the ECB that is about to inundate the banks with very advantageous interest rates (530 billion Euros at 1% for three years, after the 490 on the same terms allocated in December) to revive interbank credit and for the businesses.
     Lastly, the single currency is endowing itself with an integrated economic governance: the new treaty (Treaty on Stability, Coordination and Governance - TSCG) signed on Friday, 1st March by 25 countries (Great Britain and the Czech Republic have refused to join) imposes a rigid budget discipline upon the Member States and commits them to coordinating their respective economic policies). However, it would be prudent to limit any cry for joy, seeing the persistence of substantial uncertainties. The first goal indeed concerns the TSCG, which in order to be implemented must still be ratified by at least 12 States. The Irish Prime Minister, Enda Kenny, has already announced a referendum which appears to be a particularly delicate one (Dublin has already voted ‘No’ to Nice and to Lisbon), while François Hollande, in the case of his being elected to the Élysée, has shown his intention to renegotiate it.
     The second critical element concerns the reservations expressed by Berlin towards the increase in the capacity of the ESM from the current 500 billion Euros to the 750 hoped for both by Washington and by the IMF. Further concern is aroused by the incapacity of the Twenty-seven to identify common solution for the boosting of growth, as there is a split between those who believe it is necessary to undertake the path of the liberalisations (at least twelve countries, amongst which the United Kingdom and Italy) and those who instead urge greater state interventionism (France first and foremost). The latest destabilising element was the announcement of the Spanish Prime Minister, Mariano Rajoy, who said that his country’s own deficit this year will be 5.8% and not 4.4% as agreed on with Brussels. 
     Rajoy has urged a loosening of the budget constraints by virtue of the “changing economic situation”: in a context of recession the compliance with the terms would imply drastic cuts for Madrid, close to 40 billion Euros. Moreover, Spain is the mouthpiece for a need shared by other countries. Portugal finds itself in the same situation, with an expected recession of 3.3% for 2012. Even in the Netherlands the deficit should reach 4.4% in 2012 and stay above 3% for the next three-year period. Visibly annoyed by Rajoy’s requests and fearing the opening of the floodgates to the claims of the other troubled countries, Barroso has opted for the hard line demanding that the Spanish government should present the 2012 Budget by the end of March, a budget that will have to be drafted by complying with the aim of containing the deficit to 4.4%.
     Beyond the optimism shown on the surface, in short, the impression is that the summit has not been able to get the EU to emerge from the dilemma that has been gripping it for some time: on the one hand, the recession (which is accompanied by a worrying increase in the unemployment rates) is progressively infecting the Old World under the thrust of the plans for the deficit reduction passed a little everywhere; on the other, the Eurozone governments fear that the slightest loosening of the grip of the policies of budget rigour will fuel speculation on the sovereign debts making market pressure shoot up again.

Riccardo Brizzi
(University of Bologna)